How to Develop a Strategy Like a Professional

Video Transcription:

Hello, traders. Welcome to the Pro Trading course and the eighth module, Professional FX and CFD Trading. In this lesson, we’re going to develop a strategy like the professionals do. Now, of course, that you can use a strategy that we are going to be developing to trade yourselves, but the main goal of this lesson is for you to learn how to think about developing a strategy.

And first of all, we’re going to go to the charts. And as you can see, we are looking at the 15-minute U.S. dollar/Canadian dollar chart. And because we are looking at the 15 minutes, you already know that the strategy that I want is based on day trades. And what I want is to profit from these short-term momentums, either to the downside or to the upside.

Now, how are you going to profit from these short-term momentums? Well, we are going to look for breakouts, okay? Now, you see how we are starting to think about what we wanna trade before choosing our instruments or our indicators. Now, we want to profit from short-term momentum to the upside or to the downside on a daily basis. And for that, we need breakouts, and for breakouts, we need levels, all right?

So what are we going to choose to…or what are we going to choose as our levels? Well, that’s easy. We are going to use the daily pivots as our levels. But if you put…and let me show you, actually, I’m going to add the daily pivots to the U.S. dollar/Canadian dollar chart. Now, you can see that these are not the same pivots that I use on my daily charts, because I want the historical pivots on my charts, too, for back-testing purposes, okay?

Now, you can see that right here, if we only choose the pivots as our breakout signal, we are going to get trapped in fake-outs, just like in this case, and in this case, a lot of the times, all right? And right here we have another fake-out. So how are we going to be profitable just by trading breakouts on pivot points with… Well, in this case, you see that we have one winner and three losers, if we only use daily pivots. We need an extra indicator that is going to trigger correctly the…or is going to trigger the correct setups.

And in this case, we could use the parabolic SAR or fractals. And I’ve chosen to use fractals. And fractals are these triangles right here, and the fractals are directional tools. When a fractal is printed, this is the highest point. Price got in a five-bar structure, all right? When a five-bar structure completes, we have a new five-bar structure, and right here, this is the lowest point of that five-bar structure. Now, it really doesn’t matter, the depth of the fractals indicator, because we are going to use it in confluence with our pivot levels, okay?

Now, first of all, let’s go through the rules of the strategy. The first rule is the most important rule, and it’s the directional tool or the directional rule. If price is trading below the daily pivot, or this blue line right here, we are going to look for breakouts to the downside. If price is trading above the daily pivots, we are going to look for breaks to the upside. These breakouts can come on the daily resistance one to the upside, daily resistance two to the upside, or daily resistance three to the upside.

And it can come to the daily support one to the downside, daily support two to the downside, and so on, okay? If price is trading above the daily pivot, we look for breaks on the daily’s resistance, and if price is trading below the daily pivot, we look for breakouts below the daily supports, okay? That simple. Now, if price is trading below the daily pivot, we can also look for breaks above the daily pivot and vice versa. If price is trading above the daily pivot, we can look for breakouts below the daily pivot. This is how we’re going to use the directional tool, okay?

When the sentiment is bullish, we look for bullish breakouts. When the sentiment is bearish, we look for bearish breakouts. And, of course, the sentiment can change in a daily basis. Now, how are we going to trigger these entries? Well, that’s easy. We are going to look for fractals to create right here at the daily pivot, or at the daily resistance if we’re looking for long opportunities, or at the daily support if we’re looking for short opportunities.

Now, how are we going to trade the strategy? In this case, or in this example, price is trading below the daily pivot, and you can see that it tested it once right here and twice right here. So how are we going to trade it? We are only going to use pending orders, all right? If we wanna buy, we’re going to use a buy-stop above the last fractal, or above the tip of the last fractal. And if we wanna sell, a sell stop below the tip of the last fractal.

In this case, we are looking at a breakout of the daily pivot, and we are looking at the breakout of the daily pivot to go from a bear-bias to a bull-bias. So what we’re going to do is we’re going to put a buy-stop right here. Now, this is where the buy-stop should be, but we have some other rules that we need to go through, because we are not going to be trading this, well, strategy blindly.

First of all, we need to look at the risk versus the reward scenario. And to look at the risk versus the reward scenario, we need to locate our stop-loss and our targets. The stop-loss will always go below the previous fractal on a buy trade, or below the last fractal on a buy trade and above the last fractal on a sell trade.

In this case, we have the last fractal right here, so this would be our open risk. Now, the targets are always going to be the next pivot level, right here. And in this case, we have an open risk of 70 pips, and we have the target right at 19 pips. So if you don’t get at least a one to one risk to reward scenario on this particular system, you don’t take the trade. So, we, in this case, when you put the pending order right here and the fractal creates right here, you are going to eliminate this entry because the risk to reward just doesn’t cut it for the strategy.

Now, price breaks and hits the next pivot. And because we are trading now above the daily pivot, we are looking for breaks to the upside. So what are we going to do? We are going to put a pending order right here, all right? Now, remember that the fractal needs to print in confluence with the pivot level. If the fractal had printed between the daily pivot and the daily resistance one, we don’t take the trade. It has to print in confluence, just as in this case right here, okay?

Now, we put the stop order and then we put the stop-loss right here, below the next fractal, or below the last fractal. And, of course, we already know that our targets are going to be right here, at the next pivot level. And in this case, we do have a better than a one to one risk to reward scenario, because we are risking 25 pips in order to make 50 pips. So we have a one to two risk to reward scenario, so we are going to take that trade. And as you can see, we hit our targets. Well, we can say that we hit the money, actually. And the targets got filled within two candles, okay?

This is the basic strategy. Now, you can see that on the top left side of my chart I have the ADR or the average directional range. Let me zoom out a little bit. And we are going to use the ADR in order to filter out, but setups, too. Let’s imagine that we wanna trade at this breakout right here, okay? We are going to put our buy-stop right here. And, of course, we have a… Well, we have an open risk of about 40 pips, but the targets are all the way up here at 82 pips. So we can make it or take the trade, but we are going to use the average daily range, excuse me, to filter out this kind of setups that are going to fill us, but then price is going to reverse.

And the reason that that happened is because, from the low of the day to our entry, we already had moved 96 pips on a range of 128. So if we already have moved more than 60% of the average directional range, or the ADR, we don’t take the trade. Why? Because it’s very possible that price is going to just move the extra 30 pips of the ADR and then move back down and take us out on a loss.

So these are the rules. Price is trading below the daily range, we look for short opportunities. I’m sorry, price is trading below the pivot, or the daily pivot, we look for breakouts below the daily support one, two, and three. Price is trading above the daily pivot, we look for breaks above the daily resistance one, two, three, using our fractals as triggers and, of course, our fractals as stop-losses, and we can also look for breakouts from a bear to a bull site on the daily pivot or from a bull to a bear site on the daily pivot, too.

We use the ADR in order to filter out last minute trades that are going to go or wait a few pips and are going to come back and hit our stop-losses. And one last thing, we are going to always trail our stops with fractals. Now, let me go to an example. Right here we have a very clear example of what I’m talking about. Now, let’s imagine that we take this break of the daily resistance one right here. Our stop-loss should go, of course, below the last fractal, right here, okay?

But what happens when we get filled and price starts to move up? Another fractal prints. So we move our stop to the latest printed down fractal if we are in a buy trade or the latest printed up fractal if we are in a sell trade. And the reason we are going to move our stops with fractals, or the printed fractals, is because if these down fractals in a buy trade get broken, this means that the direction of the market is going to change or has changed.

In this case, we don’t have another fractal that prints until our targets get hit, but let’s imagine that we have a fractal that prints right here. In that case, what would happen is that we would have to move our stops just below that fractal, right here. That would give us a more than and a better than a breakeven position, or better than a breakeven trade on an open position.

And the reason we are going to be trailing our stops, too, is because the amount of trades that we can take with this strategy is much bigger than with a manual strategy, and we always want to protect the open risk and minimize it to its highest point.

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